DISSOLVING AND WINDING DOWN THE

KENTUCKY BUSINESS ENTITY

Sponsor: Business Law Section CLE Credit: 1.0

Wednesday, June 21, 2017 10:40 a.m. - 11:40 a.m.

East Ballroom A-B Owensboro Convention Center

Owensboro, Kentucky

A NOTE CONCERNING THE PROGRAM MATERIALS

The materials included in this Kentucky Bar Association Continuing Legal Education handbook are intended to provide current and accurate information about the subject matter covered. No representation or warranty is made concerning the application of the legal or other principles discussed by the instructors to any specific fact situation, nor is any prediction made concerning how any particular judge or jury will interpret or apply such principles. The proper interpretation or application of the principles discussed is a matter for the considered judgment of the individual legal practitioner. The faculty and staff of this Kentucky Bar Association CLE program disclaim liability therefore. Attorneys using these materials, or information otherwise conveyed during the program, in dealing with a specific legal matter have a duty to research original and current sources of authority.

Printed by: Evolution Creative Solutions 7107 Shona Drive

Cincinnati, Ohio 45237

Kentucky Bar Association

TABLE OF CONTENTS The Presenters ................................................................................................................. i Dissolution of a Limited Liability Company ...................................................................... 1

Introduction .......................................................................................................... 1 The Effect of Dissolution upon the LLC ................................................................ 7 Articles of Dissolution .......................................................................................... 9 Winding Up ........................................................................................................ 10 The Effect of Reinstatement after Administrative Dissolution ............................. 13

THE PRESENTERS

Vincent F. Heuser, Jr. Hirsh and Heuser

3600 Goldsmith Lane Louisville, Kentucky 40220

(502) 458-5879 vince@heuserlawoffice.com

VINCENT F. HEUSER, JR. is the managing partner of Hirsh and Heuser in Louisville where he focuses his practice in the areas of business law, estate planning and litigation, including asset protection and security. He received his J.D. from the Louis D. Brandeis School of Law at the University of Louisville. Mr. Heuser is admitted to practice before the United States District Court, the United States Court of Appeals for the Sixth Circuit and the United States Tax Court. R. Douglas Martin Doug Martin Law Office 1031 Wellington Way, Suite 135 Lexington, Kentucky 40513 (859) 224-0101 dmartin@dougmartinlaw.com R. DOUGLAS MARTIN maintains a private practice in Lexington. Prior to opening his practice, Mr. Martin worked with Greenebaum Doll & McDonald and Stoll Keenon & Park. He also served as general counsel to the Kentucky Cabinet for Economic Development, as well as the 10th District representative to the Lexington-Fayette Urban County Council. Mr. Martin received his B.A. from the University of Kentucky and his J.D. from the University of Kentucky College of Law, where he was a member of the Kentucky Law Journal. He is a member of the Fayette County and Kentucky Bar Associations. Mr. Martin has twice served as chair of the Kentucky Bar Association Business Law Section and is a frequent speaker and author on business law, commercial real estate and government financial incentives. Since 2008, he has chaired the University of Kentucky's Biennial Real Estate Law Institute, and serves on the planning committees for the University of Kentucky Biennial Business Associations Law Institute, the Kentucky Bar Association Securities Law Conference, and the Kentucky Commercial Real Estate Conference. In addition, he is the author of the Kentucky Small Business Law Blog.

i

Joshua M. O'Bryan Frost Brown Todd, LLC

400 West Main Street, 32nd Floor Louisville, Kentucky 40202

(502) 568-0218 jobryan@fbtlaw.com

JOSHUA M. O'BRYAN is a member of Frost Brown Todd, LLC in Louisville and practices in the area of corporate law. He received his BS/BBA from the University of Kentucky and his J.D., cum laude, and M.B.A., with distinction, from the University of Louisville. Mr. O'Bryan is a member of the Louisville, Kentucky and American Bar Associations. He is a board member and president of Personal Counseling Service, Inc. and founding member of Focus Forward. In addition, he is a volunteer with Legal Aid, Junior Achievement and the Jefferson County Public Schools. Thomas E. Rutledge Stoll Keenon Ogden, PLLC 500 West Jefferson Street 2000 PNC Plaza Louisville, Kentucky 40202 (502) 333-6000 Thomas.rutledge@skofirm.com THOMAS E. RUTLEDGE is a member in the Louisville office of Stoll Keenon Ogden, PLLC and is a member of its Business Service practice and its Banking Litigation practice. He received his B.A., cum laude, from Saint Louis University, his J.D. from the University of Kentucky College of Law and is a University of Notre Dame Graduate Fellow. Mr. Rutledge was a member of the committee that drafted the Kentucky Limited Liability Company Act and the 1994 Limited Liability Partnership amendments to the Kentucky Partnership Act. He was the principal drafter of the Kentucky Revised Uniform Partnership Act (2006), the Kentucky Uniform Limited Partnership Act (2006), the Kentucky Business Entity Filing Act, the Kentucky Uniform Statutory Trust Act (2012), the Kentucky Uniform Limited Cooperative Association Act and various statutory amendments adopted in 2007, 2010, 2011, 2012, 2013 and 2015. Mr. Rutledge is the immediate past chair of the Committee on LLCs, Partnerships and Unincorporated Entities, Section of Business Law of the American Bar Association, an ABA advisor to the Series Drafting Committee, and is one of twenty-six members nationwide on the Committee on Corporate Laws. He is a member of the Louisville, Kentucky and American Bar Associations and the American Law Institute. Mr. Rutledge has authored numerous published articles and serves as the editor of the American Bar Association's LLC & Partnership Reporter. He has served as an adjunct professor at the University of Kentucky College of Law and is a Fellow at the University of Louisville Louis D. Brandeis School of Law.

ii

LIMITED LIABILITY COMPANIES IN KENTUCKY (UKCLE 2011) 2017-1 AMENDMENT & RESTATEMENT OF CHAPTER 9

DISSOLUTION OF A LIMITED LIABILITY COMPANY Thomas E. Rutledge

© The Author May 31, 2017

This Cumulative Supplement may be downloaded free of charge from http://ssrn.com/abstract=2129208

CONTENTS 9.1 Introduction 9.2 The Effect of Dissolution Upon the LLC 9.3 Articles of Dissolution 9.4 Winding Up [9.1] Introduction

Dissolution of a limited liability company may come about by any of six reasons,

namely:

• upon having reached a definite date of dissolution set forth in the articles of organization;1

• as otherwise dictated by a written operating agreement;2 • by agreement of the members;3 • for the failure to have a member;4 • pursuant to judicial order;5 or • by administrative dissolution by the Secretary of State.6

1 Ky. Rev. Stat. Ann. §275.285(1). 2 Ky. Rev. Stat. Ann. §275.285(2). 3 Ky. Rev. Stat. Ann. §275.285(3). 4 Ky. Rev. Stat. Ann. §275.285(4). 5 Ky. Rev. Stat. Ann. §275.285(5). 6 Ky. Rev. Stat. Ann. §275.285(6).

1

This chapter will begin by reviewing seriatum the various events that will trigger an LLC; dissolution, proceeding then to discuss the effect of dissolution on the LLC and its members/managers. Last, it will review the process of winding up. [9.1.1] Dissolution upon Having Reached a Definite Date of Dissolution

While such is in no manner required, an LLC may set forth in its articles of

organization a definite date upon which it will dissolve.7 Having reached the end of its term as defined in its articles of organization, the LLC is dissolved,8 but with a limited opportunity for retroactive cure. That cure is accomplished by, within the 60 days after the date of dissolution, the LLC amending its articles to either delete the term provision or extend it to a future date. In either instance, that amendment will relate back and be effective as of the previously provided-for date of termination, and the existence of the entity will not be interrupted.9 Conversely, after that 60 day period has run, amendment of the organic filing is no longer permitted, and the organization must proceed to wind up and terminate.10

The Secretary of State, with respect to a business entity with a limited period of

duration, may issue a certificate of dissolution during the 60 day period during which the business entity may still cure its dissolution for having reached the end of its term.11 During that 60 day cure period, the Secretary of State's office will not be able to issue, with respect to that business entity, a certificate of existence12 unless and until the articles of organization have been amended to extend or delete the termination date. [9.1.2] Dissolution as is Otherwise Required by the Operating Agreement

The operating agreement (or the articles of organization) may define events upon

which the LLC will dissolve.13 For example, it could be provided that upon the death or resignation of a particular member or upon the sale of substantially all company assets that the LLC will dissolve.

That the LLC will be dissolved upon an event set forth in an operating agreement

is entirely a matter of contract, and the LLC will need to file articles of dissolution in order to make that fact of public record.14 The operating agreement should specify both who

7 Ky. Rev. Stat. Ann. §275.025(2). 8 Ky. Rev. Stat. Ann. §275.285(1). 9 Ky. Rev. Stat. Ann. §14A.8-010(1); see also Rutledge, The 2007 Amendments to the Kentucky Business Entity Statutes, 97 Ky. L.J. 229 at 247-48 (2008-09). 10 Ky. Rev. Stat. Ann. §14A.8-010(2). 11 Ky. Rev. Stat. Ann. §14A.8-010(3). 12 Ky. Rev. Stat. Ann. §14A.2-130. 13 Ky. Rev. Stat. Ann. §275.285(2). 14 Ky. Rev. Stat. Ann. §275.315.

2

has the authority, upon the event transpiring, to execute and deliver for filing the articles of dissolution and whether the event may be subsequently waived (prior to filing articles of dissolution) by amendment of the operating agreement. [9.1.3] Dissolution by the Members

An LLC may dissolve upon the consent of all members or such other threshold

as is set forth in the operating agreement.15 [9.1.4] Dissolution for Failure to Have a Member

An LLC must have at least one member.16 Prior to the 2007 amendments, the

KyLLCA was silent as to what occurs when a LLC ceases to have a member such as upon the death or termination of the sole member. The addition of subsection (4) to KRS § 275.285 addressed this situation. Generally speaking, the LLC will not be dissolved if:

• a succession mechanism set forth in a written operating agreement is satisfied;

or • the successor-in-interest of the last remaining member determines to continue

the LLC. Prior to this amendment, the successor to the last member would be an assignee of the member, but would be unable to cause their own admission as a member.17 While an operating agreement may provide for the admission of a successor member, most do not. The consequences of having neither a member nor a provision allowing, sua sponte, the admission of a member, can be troubling. Consider a single member LLC, member managed, with a piece of realty. The LLC is preparing to sell the realty when the sole member dies intestate. No person now has actual agency authority on behalf of the LLC and nobody is vested with authority to execute the deed and cause the transfer of the realty.18 Court intervention is necessary to authorize the estate or its

15 Ky. Rev. Stat. Ann. §275.285(3); see also Rutledge, The 2007 Amendments to the Kentucky Business Entity Statutes, 97 Ky. L.J. 229, 244-45 (2008-09). The alternative threshold must be in writing. 16 Ky. Rev. Stat. Ann. §275.015(8). Contrast Va. Code Ann. §13.1-1038.1(A)(3) (permitting the formation of an LLC that does not have a member). The Revised Uniform Limited Liability Company Act permits the formation of an LLC without a member (a so called "shelf LLC") with provisions to address the status of the organization until such time as a member is admitted and the mechanism by which notice is given that the LLC has a member and is no longer "on the shelf." RULLCA §201, 6A U.L.A. (2007 Supp.) 238. These provisions have received significant criticism (see, e.g., Larry E. Ribstein, An Analysis of the Revised Uniform Limited Liability Company Act (2006), 3 Va. L. & Bus. Rev. 35, 40-42 (Spring 2008)) and in the four states that have to date adopted RULLCA (see 2008 Idaho Session Law ch. 176, Iowa 2007 HF 2633, Nebraska 2010 LB 888 and Wyoming 2010 SF 18), the "Shelf LLC" provisions were not adopted. 17 See Ky. Rev. Stat. Ann. §275.265(1). 18 Ky. Rev. Stat. Ann. §275.135(1); id. §275.245(1); id. §275.255(1)(c).

3

representative to execute and deliver the deed as the agent for the LLC. With this new provision, the successor of the last member will have the right to elect themselves to membership and continue the operation of the LLC.19 This election must take place within ninety (90) days of the disassociation of the last remaining member, and must be in writing.20

Alternatively, and controlling if existing, the operating agreement may provide for

the processes to be followed, or the operating agreement could eliminate the right of the successor to the last member to continue the LLC. [9.1.5] Judicial Dissolution

Upon the petition of a member, the circuit court may grant a decree dissolving

the LLC if "it is established that it is not reasonably practicable to carry on the business of [LLC] in conformity with the operating agreement."21 The appropriate court for the action is that for the county in which the principal office of the LLC is located or, if the LLC has no principal office in Kentucky, for the county in which the registered agent is located.22 The decision dissolving the LLC is to specify the effective date of the dissolution and is to be delivered by the clerk to the Secretary of State for filing.23 Upon the entry of the order of dissolution the LLC will enter the winding up phase.24

No cases interpreting the "is not reasonably practicable to carry on the business

of the limited liability company in conformity with the operating agreement" standard has been decided under Kentucky law. A Kentucky partnership case, Allen v. Cummings,25 referenced but did not interpret the same standard as utilized in the partnership act. A

19 It should be recognized that the successor-in-interest need not be only one person. For example, an individual may provide in her will that her membership interests in the LLC will upon her death go to her two children. The member in question dies, and the operating agreement does not address the question of what happens upon the LLC no longer having a member. Each of the children, each being a successor-in-interest of the last remaining member, may elect to continue the LLC and to their individual admission as a member, and neither requires the consent of the other to their admission as a member. 20 See Ky. Rev. Stat. Ann. §275.285(4)(b); see also L.B. Whitfield, III Family LLC v. Whitfield, ___ So.3d ___, 2014 WL 803363 (Ala. Feb. 28, 2014). 21 Ky. Rev. Stat. Ann. §279.290(1). See also Styslingr v. Brewster Park, LLC, 321 Conn. 312, __ A.3d (Sup.Ct. Conn. 2016) (assignee does not have right to move for judicial dissolution of LLC). 22 Ky. Rev. Stat. Ann. §275.290(1). Presumably only a Kentucky court, and not a foreign court, may order judicial dissolution of a Kentucky organized LLC. See Peter B. Lading and Kyle Evans Gray, Judicial Dissolutions: Are the Courts of the State That Brought You In The Only Courts That Can Take You Out?, 70 Bus. Law. 1059 (Fall 2015). 23 Ky. Rev. Stat. Ann. §275.290(2). The statute is silent as to the consequence of the failure to file the dissolution order with the Secretary of State. 24 Ky. Rev. Stat. Ann. §275.290(3). 25 500 S.W.2d 795 (Ky. 1973).

4

bankruptcy court in Iowa stated that the "not reasonably practicable" standard lacks a prevailing interpretation.26 A New York decision27 held the standard to apply when:

(1) Management is unable or unwilling to reasonably permit or promote the stated purpose of the entity to be realized or achieved; or (2) Continuing the entity is financially unfeasible. In Delaware, which allows LLC judicial dissolution on a "not reasonably

practicable" standard,28 it has interpreted the standard as being met when the members were deadlocked and the LLC lost its sole client. The court reasoned that the LLC's sole purpose of servicing that client no longer existed, and therefore it was not possible to continue the business.29

The South Dakota Supreme Court held that the inability to resolve the members'

differences (deadlock) frustrated the LLC's economic purpose to the point the LLC could no longer function as it had been functioning.30 In contrast, a New York court denied a request for dissolution of a profitable and functioning LLC in which the members were deadlocked.31 In contrast, in a Delaware decision,32 dissolution of an LLC was granted when co-equal managers are deadlocked in deciding the future direction of the company with no mechanism to solve the dispute even as, in an earlier decision, a contentious relationship between the two parties to the venture was not sufficient to justify dissolution.33 A Washington court ordered dissolution based upon the "high degree of animosity" existing between the members such that "they no longer can act together to make reasonable business decisions relating to the [LLC]."34

26 In re Hefel, 2011 Bank. LEXIS 3750 (Bankr. N.D. Iowa 2011). 27 In the Matter of 1545 Ocean Ave, LLC, 72 AD 3d 121, 131 (NY. App. Div. 2d Dept. 2010). 28 See Del. Code Ann. tit. 6, §18-802. 29 In re Silver Leaf LLC, 2005 Del. Ch. LEXIS 119 (citing P.C. Tower Ctr. Inc, v. Tower Ctr. Dev. Assoc. LP, 1989 Del. Ch. LEXIS 72). 30 Kirksey v. Grohmann, 754 N.W.2d. 825 (S.D. N.Y. 2008). 31 Schindler v. Niche MediaHoldings, LLC, 772 N.Y.S. 2d. 781 (N.Y. Sup.Ct. 2003). 32 Vila v. BVWebTies LLC, No. 4308-VCS (Del. Ch. 2010). 33 Cincinnati Bell Cellular Systems Co. v. Ameritech Mobile Phone Serv. of Cincinnati, Inc., Civ. Act. No. 13389, 1996 WL 506906, *6-7 (Del. Ch. Sept. 3, 1996). 34 Lindsay v. Pacific Topsoils, Inc., 2003 WL 22121055 (Wash. Ct. App. Sept. 15, 2003).

5

In 2015 the LLC Act has been amended to provide for judicial supervision of the winding up even where the dissolution itself is not judicial in nature.35 This provision has application where, for example, the company has dissolved in accordance with its operating agreement or otherwise, but the members either failed to proceed with the winding up and liquidation process or are unable to agree as to how it should be accomplished. This provision is consistent with the law governing business corporations.36 In addition to being consistent with the Kentucky Business Corporation Act, judicial supervision of an LLC's winding up is consistent with the LLC Acts of many other states.37 [9.1.6] Administrative Dissolution

The Secretary of State may initiate the administrative dissolution of a domestic

LLC:

• that does not respond to interrogatories from the Secretary of State;38 • that does not file its annual report by the due date;39 • that does not have a registered office or registered agent for 60 days or more; • that does not notify the Secretary of State within 60 days after a change in the

registered office or agent, a resignation of the registered agent or the discontinuance of a registered office; or

• for such other reasons as may be provided in the Business Entity Filing Act or

the LLC Act.40

A LLC will be given notice of the grounds for administrative dissolution41 sent to the principal office address.42 If those grounds are not addressed or remedied during a 60 day cure period commencing from the date the notice was sent, the entity will be administratively dissolved.43 A LLC administratively dissolved continues to exist but is

35 Ky. Rev. Stat. Ann. §275.290(5), created by 2015 Ky. Acts, ch. 34, § 76. See also Rutledge, The 2015 Amendments to the Kentucky Business Entity Statutes, 43 Northern Kentucky Law Review 129 (2015-16). 36 See Ky. Rev. Stat. Ann. §271B.14-300(4). Accord id. §272A.12-060(3); id. §386A.8-050(2). 37 See, e.g., Minn. Stat. Ann. §322B.83; Tenn. Code §48-245-801. 38 See also Ky. Rev. Stat. Ann. §14A.1-040. 39 See also Ky. Rev. Stat. Ann. §14A.6-010. 40 Ky. Rev. Stat. Ann. §§14A.7-010(1)(a)-(d). 41 Ky. Rev. Stat. Ann. §14A.7-020(1). 42 Ky. Rev. Stat. Ann. §14A.2-010(12). 43 Ky. Rev. Stat. Ann. §14A.7-020(2).

6

restricted to activities necessary to wind up and liquidate its affairs.44 Administrative dissolution may be cured and relates back to the date of dissolution,45 but reinstatement is not possible if the entity has taken certain steps to wind up it affairs.46 The denial of an application to reinstate may be appealed to the Franklin Circuit Court.47 [9.2] The Effect of Dissolution upon the LLC

A dissolved LLC, irrespective of the event precipitating its dissolution, continues

to exist as an LLC.48 A dissolved LLC may "not carry on any business except that appropriate to wind up and liquidate its business and affairs"49 and must commence to wind up its affairs.50 The statute is specific as to numerous consequences that do not follow from dissolution, namely:

• unless written operating agreement provides to the contrary, dissolution does not

transfer title to any of the LLC's property;51 • unless a contrary rule is provided either in a written operating agreement or the

authorization to dissolve, a limited liability company interest may still be transferred;52

44 Ky. Rev. Stat. Ann. §14A.7-020(3); see also id. §275.300(2). 45 Ky. Rev. Stat. Ann. §14A.7-030. 46 Ky. Rev. Stat. Ann. §14A.7-030(4). 47 Ky. Rev. Stat. Ann. §14A.7-040. 48 Ky. Rev. Stat. Ann. §275.300(2). See also PLR 201522001 (May 29, 2015) (administrative dissolution of corporation did not terminate corporate existence; "[a] corporation is subject to Federal corporate income tax liability as long as it continues to do business in a corporate manner, despite the fact that its recognized legal status under state law is voluntarily or involuntarily terminated.") 49 Ky. Rev. Stat. Ann. §275.300(2). See also Styslinger v. Brewster Park, LLC, 321 Conn. 312, ___ A.3d ___ (2016) ("After dissolution, the purpose of the LLC is no longer to maintain its business operations, but to wind up its affairs so that the LLC's assets may be liquidated and distributed to its members or their assignees."). 50 Ky. Rev. Stat. Ann. §275.285. 51 Ky. Rev. Stat. Ann. §275.300(3)(a). See also Potter v. Blue Flame Energy Corp., No. 2002-CA-001404-MR (Ky. App. Oct. 31, 2003) (Not to be Published) (corporate dissolution did not effect transfer of title of corporate owned real property to corporation's shareholders); Pinkerton v. Pinkerton, 548 So.2d 449 (Ala. 1989) (while descendants of a shareholder held the shares as tenants-in-common, those descendants were not, with other shareholders, tenants-in-common as to the property of the corporation); Mukon v. Gollnick, 151 Conn. App. 126, 92 A.3d 1052 (Conn. App. 2014) (dissolution of single-member LLC did not effect transfer of LLC's assets to sole member). 52 Ky. Rev. Stat. Ann. §275.300(3)(b).

7

• unless a contrary rule is provided for in a written operating agreement, dissolution does not subject the members or managers to standards of conduct different than those apply pre-dissolution;53

• except as may be provided in a written operating agreement, dissolution does not

amend the operating agreement, change quorum voting requirements or provisions applicable to the admission or removal of members, change the threshold for amending the operating agreement or terminating existing contribution obligations;54

• dissolution does not prevent the commencement of a proceeding against the LLC

in its own name;55 • dissolution does not abate or suspect[sic] any proceedings pending by or against

the LLC as of the time of its dissolution;56 • dissolution does not terminate the authority of the LLC's registered agent;57 • dissolution does not alter the LLC's obligations and responsibilities with respect

to federal and state tax returns and remission of taxes due;58 or • dissolution does not alter the rule of limited liability otherwise applicable.59

The procedure followed in Ceres Protein, LLC v. Thompson Mechanical &

Design60 upon the administrative dissolution of an LLC was incorrect. Therein, Ceres Protein, LLC, a plaintiff in the action along with Shannon, one of its members, was administratively dissolved. Thereafter the defendants moved to substitute Tarullo, the other of Ceres Protein, LLC's members, for the LLC. When, ultimately, the LLC was reinstated, it was substituted back in for Tarullo, in effect returning the parties to the place they were at the initiation of the suit.

53 Ky. Rev. Stat. Ann. §275.300(3)(c). 54 Ky. Rev. Stat. Ann. §275.300(3)(d); see also Rutledge, The 2010 Amendments to Kentucky's Business Entity Laws, 38 N. Ky. L. Rev. 383, 391-92 (2011). 55 Ky. Rev. Stat. Ann. §275.300(4)(a). 56 Ky. Rev. Stat. Ann. §275.300(4)(b). 57 Ky. Rev. Stat. Ann. §275.300(4)(c). 58 Ky. Rev. Stat. Ann. §275.300(4)(d). 59 Ky. Rev. Stat. Ann. §275.300(4)(e); see also Rutledge, The 2007 Amendments to the Kentucky Business Entity Statutes, 97 Ky. L.J. 229, 239-43 (2008-09). 60 Civ. Act. No. 3:14-CV-00491-TBR-LCK, 2016 WL 6090966 (W.D. Ky. Oct. 18, 2016).

8

The issue is that the LLC need never have been removed as a party to the suit. The dissolution of an LLC does not limit its capacity to participate in litigation.61 Furthermore, dissolution does not vest in the members the property, including the legal rights, of the LLC.62 But that is what the substitution of Tarullo purported to do. The error of treating the members of Ceres Protein LLC as the owners, upon dissolution, of the LLC's assets was ultimately corrected, but it should not have needed to be remedied.

While it is clear that the limited liability enjoyed by members and managers

survives dissolution,63 under agency law and absent reinstatement, those acting on behalf of the dissolved LLC on matters outside those appropriate for winding up and termination may be personally liable on claims arising therefrom.64 [9.3] Articles of Dissolution

A LLC dissolved upon an event defined in the operating agreement or by the

consent of the members files articles of dissolution with the Secretary of State. Conversely, no articles of dissolution are filed where the dissolution is consequent to reaching a date of termination set forth in the articles of organization, for judicial or for administrative dissolution. The articles of dissolution must set forth:

• The LLC's name; • The subsection of KRS §275.285 pursuant to which the LLC dissolved; and • The date certain of the dissolution.65

The articles of dissolution may contain such information as may be desired.66

There is no separate filing made to indicate that the winding up has been

completed.

61 See Ky. Rev. Stat. Ann. §275.300(4)(a). 62 See Ky. Rev. Stat. Ann. §275.300(3)(a); see also Potter v. Blue Flame Energy Corp., No. 2002-CA-001404-MR (Ky. App. Oct. 31, 2003) (Not to be Published) (corporate dissolution did not effect transfer of title of corporate owned real property to corporation's shareholders); Pinkerton v. Pinkerton, 548 So.2d 449 (Ala. 1989) (while descendants of a shareholder held the shares as tenants-in-common, those descendants were not, with other shareholders, tenants-in-common as to the property of the corporation); Mukon v. Gollnick, 151 Conn. App. 126, 92 A.3d 1052 (Conn. App. 2014) (dissolution of single-member LLC did not effect transfer of LLC's assets to sole member). 63 See Ky. Rev. Stat. Ann. §275.300(3)(i). 64 Ky. Rev. Stat. Ann. §275.300(2); id. §275.095; Restatement (3rd) of Agency §6.04; see also Rutledge, The 2007 Amendments to the Kentucky Business Entity Statutes, 97 Ky. L.J. 229, 243, n. 95 (2008-09). 65 Ky. Rev. Stat. Ann. §§275.315(1)-(3). 66 Ky. Rev. Stat. Ann. §275.315(4).

9

[9.4] Winding Up The winding up of the affairs of an LLC is carried out by the body with

management authority or, in certain cases of wrongful conduct, by the circuit court.67 The circuit court is that for the county in which the LLC maintains its principal office or, if that office is not maintained in Kentucky, the county in which the registered agent is maintained.68

During the winding up phase, an LLC is limited to actions related to collecting its

assets, providing for the satisfaction of its liabilities and distributing to its members of those assets that are not necessary to satisfy its liabilities.69 A non-exhaustive list of the actions appropriate to an LLC's winding up include:

• collecting the LLC's assets; • disposing of assets that were not ultimately distributed in-kind to the members; • discharging or making provision for discharging the LLC's liabilities; and • distributing the remaining property among the members according to their

interests in the company.70 [9.4.1] Agency Power of Members or Managers After Dissolution

During the winding up phase, a member or manager of the LLC may bind the

LLC in the course of transactions appropriate to the winding up of its affairs and for such other purposes as are authorized by the members or managers.71 With respect to third parties without knowledge of the dissolution, a member or manager may bind the LLC with respect to matters outside those appropriate to winding up.72 At the same time, the filing of articles of dissolution, the entry of decree of dissolution or the filing of a certificate of dissolution shall be presumed to constitute notice of the LLC's dissolution.73 Consequent to that deemed notice it is open to debate whether there can be a third-party without notice. At the same time it is open to question whether the General Assembly intended that every party doing business with an LLC is obligated to investigate its status as to dissolution. The agent on behalf of a dissolved LLC bears the risk of personal liability on contracts entered into after dissolution.74

67 Ky. Rev. Stat. Ann. §295.300(1). 68 Ky. Rev. Stat. Ann. §275.300(1)(b). 69 Ky. Rev. Stat. Ann. §275.300(2). 70 Ky. Rev. Stat. Ann. §§275.300(2)(a)-(d). 71 Ky. Rev. Stat. Ann. §275.305(1)(a); id. §275.305(3). 72 Ky. Rev. Stat. Ann. §275.305(1)(b). 73 Ky. Rev. Stat. Ann. §275.305(2). 74 But see section [9.5.1] infra.

10

[9.4.2] Distribution of Assets During Winding Up During the winding up phase, the assets of the LLC are to be applied first to the

payment or making adequate provision for the claims of creditors, which class includes members for claims not involving declared but unpaid distributions.75 Thereafter, assuming a balance remains in the assets, they are distributed in satisfaction of declared but unpaid distributions.76 Third, again assuming a balance remains, LLC assets are distributed to the members and any assignees of members in return of their respective contributions to the company.77 Fourth, any balance thereafter is distributed amongst the members in proportion to their respective sharing ratios.78 It bears noting the KRS §275.310 is silent as to its modification in an operating agreement, written or otherwise. While no Kentucky court has directly addressed the point, guidance from the courts of other jurisdictions as well as the appreciation that this provision substantially serves to protect the interest of third parties indicate that its requirements as to the order of distribution should not be subject to modification except and then only to the extent different rules are agreed to amongst the members as to their respective rights.79 [9.4.3] Known and Unknown Claims Against a Dissolved LLC

The LLC Act provides mechanisms by which an LLC may notify known or

unknown creditors of the dissolution and further providing that certain claims not brought within the procedural and timing requirements thereof shall be barred. It bears noting that these provisions are optional; a dissolved LLC is not obligated to utilize either or both.80

After dissolution, with respect to persons known to have claims against the LLC,

the LLC may provide a written notice setting forth:

• with respect to any claim made against the LLC, the information that must be provided;81

• the mailing address to which any claim should be sent;82

75 Ky. Rev. Stat. Ann. §275.310(1). 76 Ky. Rev. Stat. Ann. §275.310(2). 77 Ky. Rev. Stat. Ann. §275.310(3). 78 Ky. Rev. Stat. Ann. §275.310(4). 79 See, e.g., New Horizons Supply Cooperative v. Hack, 1999 WL 33499 (Wisc. App. 1999). 80 See Bear Inc. v. Smith, 303 S.W.3d 137 at 144-45 (Ky. App. 2010) (interpreting the equivalent provision of the Kentucky Business Corporation Act, KRS §271B.14-060, and determining that such does not give rise to an obligation to give notice of dissolution). 81 Ky. Rev. Stat. Ann. §275.320(2)(a). 82 Ky. Rev. Stat. Ann. §275.320(2)(b).

11

• a deadline, which may be fewer than 120 days after the latter of the date the notice is transmitted or the date of the filing of articles of dissolution, by which date the claim must be made;83 and

• a statement that the claim will be barred if not received by the deadline.84

Upon receipt of the claim, the LLC may either satisfy or reject it. The statute

does not require that any rejection of a claim be in writing, but obviously doing so has beneficial evidentiary effect. With respect to a rejected claim, it is barred against the LLC unless the claimant within 90 days after receiving the notice of rejection commences suit to enforce the claim.85 Likewise, there will be barred any claims not presented to the LLC within the applicable deadline.86

For purposes of determining what are the known claims against an LLC as of the

time of its dissolution, they do not include claims that are either contingent or based upon events occurring after the effective date of dissolution.87

With respect to unknown claimants, an LLC may, by means of publication, give

notice of its dissolution and thereby bar certain claims against the LLC. Publication of the notice of dissolution is to take place in a newspaper of general circulation in the county in which the LLC's principal office is maintained or, where the principal office is outside of Kentucky, in the county in which the LLC maintains its registered office.88 The published notice must provide the information that must be provided by the claimant in their claim as well as the address to which it must be sent.89 In addition, the published notice must state that any claim will be time barred if not filed within, in most instances, two years of the notice's publication.90 Where the LLC in question is a professional LLC, the two-year period is extended to five-years from the publication of the notice.91 Claims

83 Ky. Rev. Stat. Ann. §275.320(2)(c). This provision is somewhat confusing in that, under KRS §275.320(2), the written notice may be given "at any time after the effective date of dissolution," implying that the notice may be sent not earlier than the effective date of dissolution. In contrast, KRS §275.320(2)(c), by requiring that there be a minimum period of 120 days after the latter of the transmission of the notice or the filing of the articles of dissolution, implies that the notice of the right to bring a claim could predate the articles of dissolution. 84 Ky. Rev. Stat. Ann. §275.320(2)(d). 85 Ky. Rev. Stat. Ann. §275.320(3)(b). 86 Ky. Rev. Stat. Ann. §275.320(3)(a). 87 Ky. Rev. Stat. Ann. §275.320(4). 88 Ky. Rev. Stat. Ann. §275.325(2)(a). 89 Ky. Rev. Stat. Ann. §275.325(2)(b). Although not express in the statute, it is implicit that the notice must as well identify the LLC that has undergone dissolution. 90 Ky. Rev. Stat. Ann. §275.325(2)(c). 91 Id.

12

against the dissolved LLC not brought within the applicable two- or five-year period after the date of publication are barred if brought by:

• any claimant who did not, as a known claimant, receive notice under KRS

§275.320;92 • a claimant who submitted a timely claim to the LLC that was not acted upon;93 or • a claimant whose claim is contingent or based upon events occurring after the

effective date of dissolution.94 A claim brought by an unknown creditor receiving notice via publication may be

enforced against the LLC to the extent of its undistributed assets or against the members pro rata to the extent of the claim up to an amount not exceeding the LLC assets distributed to the member in the course of the liquidation.95

While the statute allowing recovery of distributed assets from members is silent

as to who has standing to bring an action, under the equivalent corporate law statute it may be brought by a corporate creditor.96 [9.5] The Effect of Reinstatement After Administrative Dissolution

An LLC, having been administratively dissolved and assuming it has not acted to

notify its creditors and otherwise wind up and liquidate its business and affairs,97 may apply for reinstatement. Assuming reinstatement is granted:

[I]t shall relate back to and take effect as of the effective date of the administrative dissolution and the entity shall resume carrying on its business as if the administrative dissolution or revocation had never occurred.98

92 Ky. Rev. Stat. Ann. §275.325(3)(a). 93 Ky. Rev. Stat. Ann. §275.325(3)(b). 94 Ky. Rev. Stat. Ann. §275.325(3)(c). It remains to be seen whether this provision constitutes an unconstitutional statute of repose. See Perkins v. Northeastern Log Homes, 808 S.W.2d 809 (Ky. 1991). 95 KRS §275.325(4). 96 See Bear Inc. v. Smith, 303 S.W.3d 137, 147 (Ky. App. 2010) ("Kentucky law allows a creditor who timely files its claim to proceed directly against a shareholder of a dissolved corporation to the extent of the corporate assets received by that stockholder…."); id. at 146 ("[W]hen a shareholder receives assets of a corporation that dissolves, such assets are held in trust for the corporation's creditors, and the shareholder remains personally liable for the corporate debt to the extent of the value of the corporate property received."). See also Reeves v. East Cairo Ferry Co., 158 S.W.2d 937, 938 (Ky. 1942). 97 Ky. Rev. Stat. Ann. §14A.7-030(4). 98 Ky. Rev. Stat. Ann. §14A.7-030(3). Prior to January 1, 2011, this rule was set forth at KRS §275.295(3)(c).

13

A frequently litigated point is the contractual or tort liability of those who acted on behalf of the administratively dissolved LLC during the period between the dissolution and the subsequent reinstatement.99 Essentially, the plaintiff argues that during the period of dissolution the LLC lacked the capacity to undertake acts not appropriate to its winding up and liquidation,100 and thus the persons purporting to act on the LLC's behalf were actually acting as principals and are therefore personally liable on the contract. The defendant argues that because reinstatement relates back to the initial administrative dissolution,101 the dissolution is of no legal effect and the rules governing the personal liability of the agents should be applied as if the dissolution never occurred.

The position of the defendant is correct, a conclusion confirmed by a 2012

amendment to the statute and the Kentucky Supreme Court's decision in Pannell v. Shannon.102

Initially, it is important in analyzing questions of this nature to be exceptionally

careful in relying upon court decisions. Many are dated and of no utility. For example, in Steele v. Stanley,103 the Court held that the shareholders of a corporation are liable for all debts and obligations undertaken after dissolution. At the time of that ruling, a corporation's dissolution terminated its legal existence.104 Further, in this era there was

99 See, e.g., Forleo v. American Products of Kentucky, Inc., 2006 WL 2788429 (Ky. App. 2006); Fairbanks Arctic Blind Co. v. Prather & Associates, Inc., 198 S.W.3d 143 (Ky. App. 2005); Esselman v. Irvine, No. 1997-CA-001155-MR (Ky. App. Jan. 8, 1999); Pannell v. Shannon, 425 S.W.3d 58 (Ky. 2014). Messing v. Paul, 147 Fed. Appx. 437 (6th Cir. 2005), is not on point; it involved liability absent reinstatement. Another decision not involving reinstatement is Pelsor v. Petoria, Inc., 2011 WL 1434641 (W.D. Ky. 2011). The Pelsor case is interesting. The corporation at issue was administratively dissolved and was not reinstated, so the effect of the reinstatement statute is actually not at issue. The interesting point is that the plaintiff is a shareholder in the defendant corporation; he is, in effect, asserting that his co-shareholders are infringing on his IP. The plaintiff has used his voting position in the corporation to preclude it from reinstating. 100 See Ky. Rev. Stat. Ann. §14A.7-020(3) ("An entity administratively dissolved continues its existence but shall not carry on any business except that necessary to wind up and liquidate its business and affairs."); id. §275.300(2) ("A dissolved [LLC] shall continue its existence but shall not carry on any business except that appropriate to wind up its business and affairs."); accord id. §271B.14-050(1) ("A dissolved corporation shall continue its corporate existence but may not carry on any business except that appropriate to wind up and liquidate its business and affairs."); see also Stearns Coal & Lumber Co. v. Douglas, 185 S.W.2d 385 (Ky. 1944) (a dissolved corporation continues to exist for the purpose of settling its affairs and paying its creditors). 101 Ky. Rev. Stat. Ann. §14A.7-030(3) ("as if the administrative dissolution or revocation had never occurred."). 102 425 S.W.3d 58 (Ky. 2014). 103 35 S.W.2d 867 (Ky. 1931). 104 See, e.g., 16A William Meade Fletcher, Fletcher Cyclopedia of the Law of Private Corporations §8113. Of course a plaintiff relying upon this reasoning could well find themselves hoist upon their own petard. Under the law of that era, a corporation's dissolution extinguished its debts. See, e.g., II Stewart Kyd, A Treatise on The Law of Corporations 516 (1794) ("The effect of the dissolution of a corporation is, that all its lands revert to the donor; its privileges and franchises are extinguished; and the members can neither recover debts which were due to the corporation, nor be charged with debts contracted by it, in their natural capacities."); James

14

neither administrative dissolution nor, crucially for these purposes, reinstatement after dissolution with retroactive effect.105 Under the modern system, a dissolved entity continues to exist and retains the power and authority to wind up and liquidate its affairs.106 After the filing of the articles of dissolution (or administrative dissolution), the entity is restricted to activities appropriate for its winding up and liquidation even as it continues to exist.107 Ergo, the Steele decision (and others of its milieu) fails to account for the statutory developments that give rise to this question. Even in more modern decisions from other jurisdictions,108 the outcome often hinges on the specific statutory language, and these differences between the states' formulae may preclude reliance on the analysis employed and the conclusions reached. [9.5.1] Irrespective of Reinstatement, an LLC Affords Its Members Limited Liability Even After Dissolution

In the case of an LLC, it must be initially recognized that the limited liability

provision of the LLC Act is broader than is the limited liability provision of the Business Corporation Act. In the latter statute, it is provided that shareholders enjoy limited liability from the debts and obligations of the corporation.109 The statute is silent as to the limited liability that is enjoyed by both the directors and the officers.110 In contrast, the LLC Act, in addition to providing that the members enjoy limited liability from the LLC's debts and obligations, goes on to extend that protection to the managers, employees and agents of the LLC.111 As such, the grant of limited liability by the LLC Act extends significantly further than does that afforded by the corporate law.

Grant, A Practical Treatise on the Law of Corporations in General as well Aggregate as Sole 314 (T. & J.W. Johnson 1854) (upon dissolution "The corporation is wholly gone, and with it are also lost and avoided all its claims, debts, and liabilities of all kinds.") 105 The "relates back" language came into Kentucky law with the 1988 adoption of KRS §271B.14-220. The prior statute (KRS §271A.615) was silent as to whether reinstatement related back or was only prospective. 106 See Ky. Rev. Stat. Ann. §14A.7-020(3); see also Greene v. Stevenson, 175 S.W.2d 519, 523-24 (Ky. 1943) (the purpose of statutes for the extension of corporate existence after dissolution "is to abrogate the common law rules relative to the reversion of corporate real estate, escheat of its personal property, and extinguishment of the debts owed by and to it"). 107 See Ky. Rev. Stat. Ann. §14A.7-020(3). It may be said that upon dissolution, whether voluntary, judicial or administrative, that the purpose of the LLC is to wind up and liquidate its business and affairs. 108 See generally Annotation, Reinstatement of Repealed, Forfeited, Expired, or Suspended Corporate Charter as Validating Interim Acts of Corporation, 42 A.L.R. 4th 392. 109 Ky. Rev. Stat. Ann. §271B.6-220(2). 110 The limited liability enjoyed by the officers of a corporation is derived not from the law of corporations, but rather the law of agency. See, e.g., Restatement (Third) of Agency §6.01 (2006); Restatement (Second) of the Law of Agency §320 (1958). While it is unquestioned that directors enjoy limited liability, the analytic underpinnings for that determination are open to debate. 111 Ky. Rev. Stat. Ann. §275.150(1).

15

An LLC continues to exist as an LLC after dissolution.112 The dissolution of an LLC does not cause any of the members, managers, employees or agents of the LLC to cease being in those roles. If, after dissolution, an LLC remains an LLC (and the statute says that is the case) and an LLC affords each of its members, managers, employees and agents limited liability from its debts and obligations (and the statute says that is the case), it necessarily follows that even after dissolution the LLC continues to afford the members, managers, agents and employees of the LLC limited liability from its debts and obligations. [9.5.2] Upon Reinstatement After Administrative Dissolution, There is Limited Liability for Actions Undertaken After Dissolution and Before Reinstatement

A dissolved LLC continues to exist as an LLC.113 From the administrative

dissolution, the LLC is restricted to activities appropriate for its winding up and liquidation.114 Upon reinstatement, it is as if the administrative dissolution had never taken place;115 the existence of the LLC continues without interruption. In that an effect of reinstatement is that the LLC's existence has not been interrupted, then the limited liability enjoyed by its agents is likewise uninterrupted.116

This rule is consistent with the Restatement (Third) of Agency (the

"Restatement"). Putting the issue in agency terms, Agent A, on behalf of Principal P, has both actual and apparent agency authority conferred at a time when P was fully competent. At some later time, P becomes incapacitated. During P's incapacity, in the ordinary course of what would otherwise be P's line of business and having fully disclosed P's identity as the principal, A enters into a contract with third-party ("TP"). At some point thereafter, P regains competency and expressly ratifies A having during the period of incapacity entered into the agreement with TP on P's behalf. Thereafter, P defaults on the agreement with TP.

Initially, even if A was not aware of P's incapacity, by entering into the contract

with TP while P was incapacitated, A violated his warranty of authority117 and is potentially liable to TP on the obligation.118 Still, by ratification119 after the incapacity was

112 Ky. Rev. Stat. Ann. §275.300(2) ("A dissolved [LLC] shall continue its existence…."); id. §14A.7-020(3) ("An entity administratively dissolved continues its existence…."). Simply put, the "dissolution" of an LLC does not terminate its existence. 113 See Ky. Rev. Stat. Ann. §14A.7-020(3). 114 See id. 115 Ky. Rev. Stat. Ann. §14A.7-030(3) ("as if the administrative dissolution or revocation had never occurred."). 116 See also Ky. Rev. Stat. Ann. §275.003(1) ("Unless displaced by particular provisions of this chapter, the principals of law and equity shall supplement this chapter."). 117 See Restatement (Third) of Agency §6.10 (2006); see also 3 Am.Jur.2d Agency §295 (2008) ("Generally, one who contracts as an agent in the name of a non-existent or fictitious principal, or a principal without legal status or existence, is personally liable on a contract so made."). 118 See Restatement (Third) of Agency §6.04 (2006) ("Unless the third party agrees otherwise, a person who makes a contract with a third party purportedly as an agent on behalf of a principal

16

lifted, P agreed to be bound on the contract with TP. The question is whether P's ratification of A's conduct during the period of incapacity cures A's breach of the warranty of authority such that TP does not have recourse against A upon P's default. The answer is that TP has no recourse against A.

The clearest authority for the proposition that the agent would not, on these facts,

be personally liable for P's obligations on the agreement is the Restatement (Third) of Agency section 4.02, which addresses the "Effect of Ratification." Presuming that the LLC ratifies the agent's actions undertaken during the period of incapacity (administrative dissolution), section 4.02(1) provides:

Subject to the exceptions stated in subsection (2), ratification retroactively creates the effects of actual authority. It is important to consider as well section 4.01(1) of the Restatement, defining

"ratification," providing:

Ratification is the affirmance of a prior act done by another, whereby the act is given effect as if done by an agent acting with actual authority.120 Official comment (b) to section 4.02 of the Restatement provides in part:

Ratification has an immediate effect on legal relations between the principal and agent, the principal and the third party, and the agent and the third party. Ratification recasts those legal relations as they would have been had the agent acted with actual authority. Legal consequences thus "relate back" to the time the agent acted.121

becomes a party to the contract if the purported agent knows or has reason to know that the purported principal does not exist or lacks capacity to be a party to a contract."). 119 See Restatement (Third) of Agency §4.02 (2006). 120 See also Restatement (Third) of Agency §4.03 (2006) ("A person may ratify an act if the actor acted or purported to act as an agent on the person's behalf."). 121 This proposition is consistent with that has been Kentucky's law on ratification. See, e.g., A & Equip. Co. v. Carroll, 377 S.W.2d 895, 897 (Ky. 1964) (citing 2 Fletcher Cyclopedia Corps. (Permanent Ed.) §752, pp. 1057-58):

If the officers of the agents of a corporation assume to act for the corporation without any authority at all, or if they exceed their authority or act irregularly, and the act is one which could have been authorized in the first instance by the stockholders, board of directors or subordinate officers, as the case may be, it may be expressly or impliedly ratified by them, thus be rendered just as binding except as to intervening rights of third persons, as if it had been authorized when done, or done regularly.

17

Ergo, even if during the period of administrative dissolution the entity could not authorize an agent to undertake an act not relating to its winding up and liquidation,122 upon reinstatement the entity's ratification of such actions causes the agent to have been vested with actual authority.123 Having actual authority to act on the principal's behalf (and assuming identification of the principal), the agent is not personally obligated on the agreement.124

This analysis is consistent with recent Kentucky decisions with the exception of

the unsound Forleo decision. In that unpublished decision, in partial reliance upon Steele v. Stanley,125 the Court held that the corporation's reinstatement after administrative dissolution126 did not impact upon the personal liability of the shareholders and officers for debts incurred after dissolution and prior to reinstatement. Further, the Court relied upon the "resume" language in KRS §271B.14-040(5) for the proposition "The 'shall resume' language necessarily implies that the corporation ceased doing business as required by KRS 271B.14-210(3)."127

As will be reviewed below, the Forleo decision conflicts with prior law and is an

aberrational decision.

122 See, e.g., Ky. Rev. Stat. Ann. §14A.7-020(4); Restatement (Third) of Agency §3.04(2) (2006). 123 See Restatement (Third) of Agency, Ch. 4, Introductory Note (2006); id. §4.01, comment b ("That is, when a person ratifies another's act, the legal consequence is that the person's legal relations are affected as they would have been had the actor been an agent acting with actual authority at the time of the act."). 124 See Restatement (Third) of Agency §6.01 (2006). This rule as to the effect of ratification and the consequent release of the agent from personal liability on the contract is in no manner a recent innovation in the law. See, e.g., Ernest W. Huffcut, The Law of Agency Including the Law of Principal and Agent and the Law of Master and Servant at §49 (p. 61) (Little, Brown & Co., 1901) ("An agent after ratification of his unauthorized act by his principal is in the same relation to the third party as if the acts had been previously authorized. The principal alone is generally liable on the contract he has ratified, …."). 125 Forleo, 2006 WL 2788427, *1. 126 Prior to January 1, 2011 and the Kentucky Business Entity Filing Act, the language employed in the LLC Act as to the effect of reinstatement and that employed in the Business Corporation Act were essentially identical. Compare Ky. Rev. Stat. Ann. §271B.14-220(3) (prior to repeal by 2010 Ky. Acts, ch. 151, §151) ("When the reinstatement is effective, it shall relate back to and take effect as of the effective date of the administrative dissolution or revocation and the corporation shall resume carrying on its business as if the administrative dissolution or revocation had never occurred.") and Ky. Rev. Stat. Ann. § 271B.14-040(5) ("When revocation of dissolution is effective, it shall relate back to and take effect as of the effective date of the dissolution and the corporation shall resume carrying on its business as if the dissolution never occurred.") with Ky. Rev. Stat. Ann. §275.295(3)(c) (prior to repeal by 2010 Ky. Acts, ch. 151, §151) ("When the reinstatement is effective, the reinstatement shall relate back to and take effect as of the effective date of the administrative dissolution, and the [LLC] shall resume carrying on business as if the administrative dissolution had never occurred."). 127 Forleo, 2006 WL 2788429, *2.

18

Esselman v. Irvine128 should have been the definitive ruling on the matter, but unfortunately it was unpublished. Squarely addressing the effect of reinstatement upon the personal liability of an agent for an agreement entered into during the period of administrative dissolution and prior to reinstatement, the Court of Appeals affirmed the trial court's conclusion that reinstatement "'absolved [Irvine] of the personal liability that might have attached had his corporation remained dissolved.'"129 Further, Esselman considered and rejected the notion that "resume" limited the effect of "shall relate back."130

The next consideration of the issue by the Court of Appeals was Fairbanks Arctic

Blind Co. v. Prather & Associates, Inc.,131 wherein it addressed an effort to dismiss a suit seeking enforcement of an agreement entered into while the corporation was administratively dissolved.132 The Court of Appeals133 held that:

When the General Assembly stated in KRS 271B.14-220(3) that reinstatement shall relate back to and take effect as of the effective date of the administrative dissolution … and the corporation shall resume carrying on its business as if the administrative dissolution … had never occurred[.] We conclude, applying the rationale of J.B. Wolfe and Joseph A. Holpuch that it [the General Assembly] intended for reinstatement to restore a corporation to the same position it would have occupied had it not been dissolved and that reinstatement validates any action taken by a corporation between the time it was administratively dissolved and the date of its reinstatement. Simply put, the General Assembly meant what

128 No. 1997-CA-001155-MR (Ky. App. 1999). 129 Id., Slip op. at 5; see also id. at 8 ("By allowing a corporation to be reinstated at "any time" after an administrative dissolution has taken place and by specifically stating that such a reinstatement shall relate back to the date of the administrative dissolution and shall operate as if the administrative dissolution has never occurred the clear intent of the statute is unambiguous. As such the finding of the trial court in this matter – that the reinstatement of ICM absolves Irvine of personal liability – is not clearly erroneous.") (emphasis in original). 130 Id. at 8. 131 198 S.W.3d 143 (Ky. App. 2005). 132 Id. at 144 ("On January 30, 2004, Prather, pursuant to Kentucky Rules of Civil Procedure (CR) 12, moved to dismiss Fairbanks' claim on the ground that, according to Kentucky Revised Statutes (KRS) 271B.14-210, a corporation that has been administratively dissolved is prohibited from carrying on any business except that which is necessary to wind up and liquidate its business. Since Fairbanks had been administratively dissolved in 1991, Prather argued, it was prohibited from entering into the 1993 contract and thus the contract was null and void."). 133 Apparently unaware of its prior decision in Esselman, the Fairbanks Court thought "Since this is an issue of first impression in the Commonwealth, …." Id. at 145.

19

is said, that upon reinstatement, it is "as if the administrative dissolution … had never occurred."134 At this juncture the Esselman and Fairbanks opinions consistently state the view

that upon reinstatement the agent is not liable upon agreements entered into on behalf of the entity after administrative dissolution and before reinstatement. It should be recognized that this rule is consistent with that described as being accepted by most jurisdictions:

In most jurisdictions, the reinstatement of a corporation following dissolution by administrative action of the court relates back to the effective date of dissolution, and directors or officers are not personally liable for actions taken during the period of dissolution or suspension. Such matters become the exclusive liability of the corporation.135 The Forleo decision was rendered in September 2006, eleven months after the

October, 2005 decision rendered in Fairbanks; how was it decided notwithstanding the Fairbanks decision? Likely we will never have a clear answer to the question. What is clear is that Fairbanks was not cited in the briefs submitted to the Court of Appeals panel considering the Forleo appeal,136 and it must be assumed that the Court's own research did not reveal the prior published law on the topic.

In Eve v. Cosmo's LLC,137 the Court considered an argument based upon the

"resume" language of the statute; of course, this was the same argument that had been considered and rejected in Esselman v. Irvine138 to the effect that there should not be limited liability for actions undertaken during the period of administrative dissolution and prior to restatement. Rejecting that argument, the Court held:

By including the language that reinstatement relates back to the date of the administrative dissolution, the Court believes that the legislature meant what it said, to wit, that a §275.295 reinstatement cures the dissolution, and that cure is effective as of the date of dissolution…. The situation herein is similar [to that in Fairbanks], where the alleged tortious

134 Id. at 146 (citation omitted). The Court of Appeals rejected an effort to apply the statutory "resume" to limit the effect of the statute. "Prather urges us to focus solely on the word 'resume' found in KRS 271B.14-220(3) and construe the statute to disavow interim corporate activities. This would effectively redact the statute to read, 'When the reinstatement is effective … the corporation shall resume carrying on its business[.]' However, as noted above, we may not subtract language from a statute nor may we render any of its language meaningless, if we can avoid doing so. Since Prater's interpretation would do so, we decline to adopt it." This determination was obviously consistent with that in Esselman. 135 16A Fletcher Cyclopedia of the Law of Private Corporations § 8117. 136 See Brief for Appellants Dean Forleo and John Tandy dated September 6, 2005 and Brief for Appellees dated November 2, 2006. 137 Case No. 06-188-DLB, Memorandum Order (E.D. Ky. Mar. 27, 2008). 138 See supra notes 124 through 126 and accompanying text.

20

conduct occurred while the LLC was administratively dissolved but then reinstated later. If contracts that were entered into on behalf of the dissolved corporation in Fairbanks were deemed valid by the Kentucky Court of Appeals, the Court believes Kentucky courts would similarly conclude when asked to interpret the LLC statute. As a result, Cosmo's LLC and its members will be able to take advantage of the limited liability that K.R.S. § 275.150(1) provides. In Pannell v. Shannon,139 the Court of Appeals rejected an effort to hold an

individual liable on a lease entered into at the time her LLC was administratively dissolved.140 Relying upon Fairbanks, the Court wrote:

[R]einstatement restores a corporation to the same position it would have occupied had it not been dissolved and that reinstatement validates any action taken by a corporation between the time it was administratively dissolved and the date of its reinstatement. Simply put, the General Assembly meant what it said, that upon reinstatement, it is "as if the administrative dissolution … had never occurred." Fairbanks Arctic Blind Co., 198 S.W.3d at 146. As reinstatement of a limited liability company relates back to the effective date of dissolution and operates as if dissolution never occurred, it naturally follows that members of such company are not individually liable for actions undertaken on behalf of the company during dissolution. See Fairbanks Arctic Blind Co., 198 S.W.3d 143. Hence, the subsequent reinstatement of Elegant Interiors as a limited liability company "related back" to date of its dissolution, and Shannon cannot be held individually liable for any actions undertaken on behalf of Elegant Interiors while it was administratively dissolved.141 Further, the Court chastised the plaintiff for citing the Forleo decision in its brief,

noting that CR 76.28(4)(c) permits the citation of unpublished authority only when there is a "complete lack of published authority upon an issue."142 Clearly, at least this panel of the Court of Appeals accepted that Fairbanks is the final authority on this point.

Thereafter, the question was considered by Judge Coffman in eServices, LLC v.

Energy Purchasing, Inc.143 When Energy Purchasing defaulted on a contract with eServices, the contract having been entered into while Energy Purchasing was administratively dissolved, it sought to hold Buchart, its agent, personally liable thereon. Energy Purchasing defended on the ground that it had been reinstated, thereby relieving Buchart of any personal liability. Judge Coffman agreed:

139 2011 WL 3793415 (Ky. Ct. App. 2011). 140 Id. at *3 ("Alternatively, Pannell argues that Shannon is individually liable because Elegant Interiors was administratively dissolved as a limited liability company at the time of execution of the March 2006 lease."). 141 Id. at 4. 142 Id., note 22. 143 2012 WL 404957 (E.D. Ky. Feb. 6, 2012).

21

Because Energy Purchasing was reinstated after Buchart signed the contracts, the corporation is treated as having been in existence when the contracts were signed…144 eServices had pinned its hopes on the Forleo decision. Judge Coffman

dissected and discarded any application of Forleo, finding its reasoning unpersuasive, that it conflicted with the operation of the express statutory language and as well conflicted with the published Fairbanks decision.145

In Harshman Construction & Electric, Inc. v. Witte,146 the plaintiffs sought to hold certain of the defendant's representatives personally liable on their claim on the basis that the defendant corporation was administratively dissolved while performing on the subject contract; it was subsequently reinstated. Reversing the determination that the individuals were personally liable, the Court of Appeals parsed KRS §271B.14-220(3), the predecessor to now applicable KRS §14A.7-030, both of which provide that upon the reinstatement of a dissolved entity, the reinstatement shall "relate back to and take effect as of the effective date of the administrative dissolution or revocation" and the organization shall proceed forward as if the administrative dissolution "had never occurred." Noting that the statute does not impose a time limitation for seeking reinstatement after administrative dissolution, and in reliance upon the 2005 ruling of the Court of Appeals in Fairbanks, the Harshman Court writing that: As reinstatement of a corporation relates back to the effective date of dissolution and operates as if dissolution never occurred, it naturally follows that the shareholders and officers of such corporation are not individually liable for actions undertaken on behalf of the corporation during its dissolution.147 In an effort to reduce to statute the rules consistently set forth in Esselman,

Fairbanks, Pannell and eServices (as well anticipating the holding in Harshman)148 and to reject the aberrational Forleo decision, the 2012 General Assembly enacted two statutory amendments to KRS §14A.7-030. First, but of smaller importance, "resume" was deleted and "continue" was substituted in place thereof.149 Second and of greater import, a new subsection (3)(c) was added to the statute, it defining one effect of reinstatement as:

144 2012 WL 404957,*2. 145 2012 WL 404957, *2-3. 146 2012 WL 2471445 (Ky. App. June 29, 2012) (Not To Be Published). 147 Slip Op. at 6. 148 See also Moore v. Stills, 307 S.W.3d 71, 81 (Ky. 2010) (giving retroactive effect to statutes "that clarify existing law or that codify judicial precedent."). 149 See Ky. Rev. Stat. Ann. §14A.7-030(3)(b) as amended by 2012 Ky. Acts, ch. 81, §83.

22

The liability of any agent shall be determined as if the administrative dissolution or revocation had never occurred.150 The Kentucky Supreme Court brought this debate to a clear conclusion in

Pannell v. Shannon.151 The dispute arose out of a defaulted lease. Shannon's LLC was the tenant – that

LLC was during the term of the lease administratively dissolved. A replacement lease was entered into in the period between the administrative dissolution and the LLC's reinstatement. When the LLC ultimately defaulted the landlord sought to hold Shannon liable on the obligation.

The real crux of the decision is the impact of administrative dissolution and

subsequent reinstatement upon each of (i) a member's limited liability and (ii) the liability of an agent on a contract entered into after dissolution and before reinstatement.152 The Court recognized that these are distinct questions based upon distinct legal principles:

[T]he liability of a director, officer, employee or agent of a limited liability entity during a period of administrative dissolution is technically a separate question from the liability of the owners of the entity.153 The Court could not have been more express about the continuity of a member's

limited liability after dissolution:

This Court concludes that a member of an [LLC] enjoys statutory immunity from liability under KRS 275.150 for actions taken during a period of administrative dissolution so long as the company is reinstated before a final judgment is rendered against the member.154 Distancing LLCs from the common law of corporations, the Court looked to the

statutes addressing a member's limited liability (KRS §275.150) and the retroactive effect of reinstatement (KRS §275.295(3)(c); now KRS §14A.7-030(3)) and determined that reinstatement wiped the slate clean.

150 See Ky. Rev. Stat. Ann. §14A.7-030(3)(c) as created by 2012 Ky. Acts, ch. 81, §83; see also Rutledge, The 2012 Amendments to Kentucky's Business Entity Statues, 101 Ky. L.J. Online 1, 11 (2012-13). 151 425 S.W.3d 58 (Ky. 2014). 152 425 S.W.3d at 68. 153 425 S.W.3d at 77. 154 425 S.W.3d at 67. It is this aspect of the decision that is most unsettling. Essentially, the balance of the decision supports and applies the statutory rules that (i) dissolution of an LLC does not terminate its existence as an LLC and (ii) dissolution does not terminate the rule of limited liability. The "so long as the company is reinstated" language cuts against the statute by in affect[sic] conditioning continuing limited liability upon reinstatement. This language may have been intended by the Court as a means of supporting the Forleo decision, but it is out of step with and adds ambiguity to what is otherwise a clear application of unambiguous statutory law.

23

The plain meaning of the relate-back language is that the company is deemed viable on reinstatement from the point of administrative dissolution onward, which necessarily includes the time of suspension between the date of administrative dissolution and reinstatement. Reinstatement under the statute literally undoes the dissolution. This is why the Secretary of State was required to "cancel" the certificate of dissolution and issue a certificate of existence. See KRS 275.295(3)(a). And that certificate of existence took effect, by statute, retroactively on the date of dissolution.155

Pannell's argument that a member's limited liability is suspended during the period between administrative dissolution and reinstatement was rejected.

Turning to the question of Shannon's liability as an agent for the LLC's obligation

undertaken while the LLC was administratively dissolved, the Court noted that the question divides into a pair of inquiries, namely:

First, can Shannon under the circumstances of this case be personally liable by reason of her merely being an agent? Second, can she be personally liable because she acted as an agent without authority? In response to the first question, the Court referred to KRS §275.150(1) and

noted that its rule of limited liability extends to the LLC's agent. As the LLC's existence had been reinstated and:

The reinstatement is retroactive to the date of dissolution, and it is as if the dissolution never occurred, giving the company a seamless existence. The limitation on the agent's liability simply for being an agent is likewise seamless.156 In that the LLC in question was subsequently reinstated, the Court found there to

be no opportunity for imposing liability on an agent. Rather, as the LLC Act protects agents from liability on the LLC's debts (KRS §275.150(1)), then:

To the extent that any liability is claimed solely because Shannon was a manager or agent of the LLC, the analysis above for why she cannot be liable as a member applies. The reinstatement is retroactive to the date of dissolution, and it is as if the dissolution never occurred, giving the company a seamless existence. The limitation on the agent's liability simply for being an agent is likewise seamless.157

155 425 S.W.3d at 68. 156 425 S.W.3d at 78. 157 425 S.W.3d at 78.

24

Providing an appropriate critical eye to the question before it, the Court observed:

The immunity provided by KRS 275.150 extends only to liability by reason of her being an agent. By alleging that Shannon acted without authority, Pannell is not claiming she is liable solely because of her status as an agent, but because she had no authority to act as an agent.158 In reliance upon the statutory statement that a dissolved LLC continues to exist

after its dissolution, the Court found that when combined with reinstatement, Shannon never lost the capacity of being the LLC's agent.

In response to the argument that giving such a broad affect to the effect of

reinstatement is improper, the Court observed:

The simple fact is that Kentucky's corporation law and other business entity laws differ from those in other states …. The existence of a majority rule can only be persuasive if the rule is based on statutes like those in Kentucky.159

158 425 S.W.3d at 81. 159 425 S.W.3d at 79, 80.

25

26